Saturday, October 16, 2010

Market segmentation vs. central planning, health sector

(Note: this is my article today for

Market segmentation is respecting the diversity among consumers who have different needs with different goals and different budget and resources. It allows price and product differentiation. Central planning abolishes market segmentation and price differentiation. There is one centralized service provision at a standardized and homogenized service standard or quality at homogenized budget and price. Where there is uniformity and homogenity, what follows next is mediocrity.

In food sector, there is no government carinderia corporation, no government restaurant administration, no government supermarket agency, no government fish and vegetable seller or fastfood chain or turo-turo corporation, no government food insurance corporation. And people are eating.

In health, there are thousands of government rural health centers, thousands of government-sponsored “botica ng bayan” and “botica ng barangay” (village pharmacies), hundreds of government hospitals run by both national and local governments, there is government health insurance corporation, there is government drug price control policy, government mandatory drug discount policy (20% + 12% expanded), various health programs -- and health problems are expanding.

What explain for this difference? Market segmentation. In food, clothing, shoes, buses, shipping lines and airlines, there is price and product differentiation The rich get more pricey services while the poor and middle class get less glamorous but nonetheless get certain services at a lower price. The poor's P20 per meal does not mean that it is less nutritous or it is poisonous, compared to the rich's P1,000 or more per meal. There is a market for everyone along different income groups, along different geographical units.

When government comes in like in healthcare, market segmentation and differentiation is generally abolished. There is no incentive to provide extra good care, extra effort to please and serve the public. The salary and bonuses are the same anyway, whether one serves 30 or 50 people, so why serve 50? This explains why the lines and queuing in many government offices and health centers are long. Perhaps this will discourage more claims for government benefits, like PhilHealth claims.

There is danger in relying too much on centralized government service delivery. Market segmentation allows people to jump and choose from one service provider or food seller to another, until they find one that serves their need and budget. There is public welfare here.

The drug price control policy is another classic example of how central planning can lead to rigid and inflexible decision making. Since June 2009 up to early this year, there have been many meetings by the DOH Advisory Council on Price Regulation. Being one of the four members from the CSOs, I have attended most of those meetings. Speakers from the industries -- local pharma, multinational pharma, hospitals, drugstores, pharmacist association, physician association -- are one in saying that price control does not achieve its goal of making essential, branded (and sometimes patented) medicines affordable to the poor. But the policy is still intact until now, zero sign that it will be pulled out by the DOH.

Fifty percent of X is still "expensive" for the poor because the poor want the price to be zero. The rich and middle class are jumping with lots of savings from continued patronage of branded products by the multinational pharma. And we thought that the DOH is heavily promoting generics drugs, not branded drugs? Watsons and other drugstores' data are showing that more and more people are switching back to branded drugs by multinationals. This seems to be the new goal of the DOH now.

Government should learn to step back and allow competitive service provision and pricing by different product and service providers. Government should also step back from intrusive and distortionary high taxation.

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